The Effect Of Rising Commodity Costs
Thursday, March 13, 2008PAUL KANGAS: The price of everything from corn to crude oil is going through the roof, and everyone from food companies to consumers are paying the price. As Diane Eastabrook reports, economists see no end in sight to the higher costs that could take a bigger bite out of household budgets.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chicago's Alpha Baking Company makes the buns that accompany Burger King's whoppers and the bread served at many restaurants and school cafeterias. The company says, in the past year, the cost of wheat used in bread flour has tripled and the cost of soybean oil, used to coat baking pans, has more than doubled. This week, Alpha Baking was forced to raise its prices across the board for the third time in a year. Company President Lawrence Marcucci calls it an unprecedented move in the firm's 30-year history.
LAWRENCE MARCUCCI, PRESIDENT, ALPHA BAKING COMPANY: We've tried some consolidation to cut our route distribution costs, our fuel, et cetera, but it's just such a low margin business, you can't absorb those very long and not have to do something.
EASTABROOK: Growing worldwide demand for food and soaring production of the corn-based fuel ethanol are fanning the fires of commodity inflation. Since the beginning of the year, the Reuters-Jefferies index of commodity prices known at the CRB has climbed more than 15 percent. As a result, Conagra Foods says later this month, it will raise prices more than 5 percent on most of its products, which include the Healthy Choice and Chef Boyardee brands. The company raised prices a handful of times last year. While CEO Gary Rodkin thinks Conagra can maintain sales with some new products, he still has concerns.
GARY RODKIN, CEO, CONAGRA FOOD: We do believe that, clearly, as we go forward, if these cost increases don't abate, we will probably see some volume tradeoff as the prices go up. But I am very comfortable that our portfolio is positioned extremely well.
EASTABROOK: Dan Basse, president of forecasting firm Ag Resource Company, doesn't see any decline in commodity prices on the horizon, unless the U.S. government intervenes.
DAN BASSE, PRESIDENT, AGRESOURCE: There either has to be more acreage that are brought into production, or we're going to have to back off on our biofuel mandates because we just don't have enough food to go around.
EASTABROOK: In the meantime, Alpha Baking's Marcucci is monitoring grain prices more carefully and hoping his customers stick with him.
MARCUCCI: It's harder to make longer term commitments with customers, because we just, we don't know where the market it going.
EASTABROOK: Marcucci says he can't rule out the possibility of another price hike later this year, especially if commodity prices keep climbing throughout the spring and summer. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
